Chapter 9-1
Chapter 9-2
REPORTING AND ANALYZING LONG-LIVED ASSETS
Accounting, Fourth Edition
9
Chapter 9-3
1. Describe how the cost principle applies to plant assets.
2. Explain the concept of depreciation.
3. Compute periodic depreciation using the straight-line method, and
contrast its expense pattern with those of other methods.
4. Describe the procedure for revising periodic depreciation.
5. Explain how to account for the disposal of plant assets.
6. Describe methods for evaluating the use of plant assets.
7. Identify the basic issues related to reporting intangible assets.
8. Indicate how long-lived assets are reported in the financial
statements.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 9-4
Plant AssetsPlant AssetsPlant AssetsPlant Assets
Determining the cost of
plant assets
Accounting for plant
assets
Analyzing plant assets
Intangible AssetsIntangible AssetsIntangible AssetsIntangible Assets
Accounting for
intangibles assets
Types of intangibles
assets
Financial statement
presentation of long-lived
assets
Reporting and Analyzing Long-Lived AssetsReporting and Analyzing Long-Lived AssetsReporting and Analyzing Long-Lived AssetsReporting and Analyzing Long-Lived Assets
Chapter 9-5
Plant assets are resources that have
physical substance (a definite size and shape),
are used in the operations of a business,
are not intended for sale to customers,
are expected to provide service to the company for a
number of years, except for land.
Plant AssetsPlant AssetsPlant AssetsPlant Assets
Referred to as property, plant, and equipment; plant and equipment; and fixed assets.
Section One
Chapter 9-6
Plant assets are critical to a company’s success
Plant AssetsPlant AssetsPlant AssetsPlant Assets Section One
Illustration 9-1
Chapter 9-7
Cost Principle - requires that companies record plant
assets at cost.
Cost consists of all expenditures necessary to
acquire an asset and make it ready for its intended use.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Revenue expenditure – costs incurred to acquire a plant
asset that are expensed immediately.
Capital expenditures - costs included in a plant asset
account.
Chapter 9-8
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Cost - cash paid in a cash transaction or the cash
equivalent price paid.
Cash equivalent price is the
fair value of the asset given up or
fair value of the asset received,
whichever is more clearly determinable.
Chapter 9-9
All necessary costs incurred in making land ready for its intended use increase (debit) the Land account.
Land
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Costs typically include:
1) cash purchase price,
2) closing costs such as title and attorney’s fees,
3) real estate brokers’ commissions, and
4) accrued property taxes and other liens on the land
assumed by the purchaser.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-10
Illustration: Illustration: Assume that Hayes Manufacturing Company
acquires real estate at a cash cost of $100,000. The property
contains an old warehouse that is razed at a net cost of $6,000
($7,500 in costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and the
real estate broker’s commission, $8,000.
Required: Required: Determine the amount to be reported as the cost of
the land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-11
LandLand
Required: Required: Determine amount to be reported as the cost of the land.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Cash price of property ($100,000)
Net removal cost of warehouse ($6,000)
Attorney's fees ($1,000) 1,000
6,000
$100,000
$115,000Cost of Land
Real estate broker’s commission ($8,000) 8,000
Chapter 9-12
Includes all expenditures necessary to make the
improvements ready for their intended use.
Land Improvements
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
Examples: driveways, parking lots, fences, landscaping,
and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements over
their useful lives.
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-13
Includes all costs related directly to purchase or construction.
Buildings
Purchase costs:
Purchase price, closing costs (attorney’s fees, title insurance,
etc.) and real estate broker’s commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building
permits, and excavation costs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-14
Include all costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
Equipment
Cash purchase price.
Sales taxes.
Freight charges.
Insurance during transit paid by the purchaser.
Expenditures required in assembling, installing, and testing the unit.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Chapter 9-15
Illustration: Lenard Company purchases a delivery truck at a
cash price of $22,000. Related expenditures are sales taxes
$1,320, painting and lettering $500, motor vehicle license $80,
and a three-year accident insurance policy $1,600. Compute
the cost of the delivery truck.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
TruckTruck
Cash price
Sales taxes
Painting and lettering 500
1,320
$22,000
$23,820Cost of Delivery Truck
Chapter 9-16
Illustration: Lenard Company purchases a delivery truck at a
cash price of $22,000. Related expenditures are sales taxes
$1,320, painting and lettering $500, motor vehicle license $80,
and a three-year accident insurance policy $1,600. Prepare the
journal entry to record these costs.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Equipment 23,820
License expense 80
Prepaid insurance 1,600
Cash 25,500
Chapter 9-17
A lease is a contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price.
To Buy or Lease?
Some advantages of leasing
1. Reduced risk of obsolescence.
2. Little or no down payment.
3. Shared tax advantages.
4. Assets and liabilities not reported.
Determining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant AssetsDetermining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.SO 1 Describe how the cost principle applies to plant assets.
Capital lease - lessees show the asset and liability on the balance sheet.
Chapter 9-18
Chapter 9-19
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and equipment,
not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
Process of allocating to expense the cost of a plant asset
over its useful (service) life in a rational and systematic
manner.
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Depreciation
Chapter 9-20
Factors in Computing Depreciation
Cost
SO 2 Explain the concept of depreciation.SO 2 Explain the concept of depreciation.
Useful Life Salvage Value
Illustration 9-6
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Chapter 9-21
Management selects the method it believes best measures an
asset’s contribution to revenue over its useful life.
Depreciation Methods
Examples include:
(1) Straight-line method.
(2) Declining-balance method.
(3) Units-of-activity method.
SO 3SO 3
Illustration 9-7 Use of depreciation methods in major U.S. companies
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Chapter 9-22
Illustration: Bill’s Pizzas purchased a small delivery truck on January 1, 2012.
Required: Compute depreciation using the following.
(a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance.
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Chapter 9-23
Straight-Line
Expense is same amount for each year.
Depreciable cost = Cost less salvage value.
Illustration 9-8
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Chapter 9-24
Depreciable Annual Accum. Book
Year Cost x Rate = Expense Deprec. Value
Illustration: (Straight-Line Method)
2012 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600
2013 12,000 20 2,400 4,800 8,200
2014 12,000 20 2,400 7,200 5,800
2015 12,000 20 2,400 9,600 3,400
2016 12,000 20 2,400 12,000 1,000
2012 Journal Entry
Depreciation expense 2,400
Accumulated depreciation2,400
Illustration 9-9
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Chapter 9-25
CurrentDepreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2012 12,000$ x 20% = 2,400$ x 9/12 = 1,800$ 1,800$
2013 12,000 x 20% = 2,400 2,400 4,200
2014 12,000 x 20% = 2,400 2,400 6,600
2015 12,000 x 20% = 2,400 2,400 9,000
2016 12,000 x 20% = 2,400 2,400 11,400
2017 12,000 x 20% = 2,400 x 3/12 = 600 12,000
12,000$
J ournal entry:
2012 Depreciation expense 1,800
Accumultated depreciation 1,800
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets Partial Year
Illustration: (Straight-Line Method)
Assume the delivery truck was purchased on April 1, 2010.
SO 3SO 3
Chapter 9-26
Declining-Balance
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Accelerated method.
Decreasing annual depreciation expense over the
asset’s useful life.
Double declining-balance rate is double the straight-line
rate.
Rate applied to book value.
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Chapter 9-27
DecliningBeginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value
Illustration: (Declining-Balance Method)
2012 13,000 40% $ 5,200 $ 5,200 $ 7,800
2013 7,800 40 3,120 8,320 4,680
2014 4,680 40 1,872 10,192 2,808
2015 2,808 40 1,123 11,315 1,685
2016 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation5,200
2012 Journal Entry
Illustration 9A-2
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 3SO 3
Chapter 9-28
Companies estimate total units of activity to calculate depreciation cost per unit.
Units-of-Activity
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Illustration 9A-3
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Expense varies based on units of activity.
Depreciable cost is cost less salvage value.
Chapter 9-29
Hours Rate per Annual Accum. Book
Year Used x Hour = Expense Deprec. Value
Illustration: (Units-of-Activity Method)
2012 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2013 30,000 0.12 3,600 5,400 7,600
2014 20,000 0.12 2,400 7,800 5,200
2015 25,000 0.12 3,000 10,800 2,200
2016 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2012 Journal Entry
Illustration 9A-4
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Chapter 9-30
Comparison of Depreciation
Methods
Illustration 9-12
Illustration 9-13
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Each method is acceptable because each recognizes the
decline in service potential of the asset
in a rational and systematic manner.
SO 3SO 3
Chapter 9-31
IRS does not require taxpayer to use the same depreciation
method on the tax return that is used in preparing financial
statements.
IRS requires the straight-line method or a special
accelerated-depreciation method called the Modified
Accelerated Cost Recovery System (MACRS).
MACRS is NOT acceptable under GAAP.
Depreciation and Income Taxes
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Chapter 9-32
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 3 Compute periodic depreciation using the straight-line method, SO 3 Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.and contrast its expense pattern with those of other methods.
Depreciation Disclosure in the Notes
Illustration 9-14
Chapter 9-33
Accounted for in the period of change and future
periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Revising Periodic Depreciation
Chapter 9-34
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Illustration: Arcadia HS, purchased equipment for $510,000
which was estimated to have a useful life of 10 years with a
salvage value of $10,000 at the end of that time. Depreciation
has been recorded for 7 years on a straight-line basis. In 2012
(year 8), it is determined that the total estimated life should be
15 years with a salvage value of $5,000 at the end of that time.
No Entry No Entry RequiredRequired
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Questions:
What is the journal entry to correct the
prior years’ depreciation?
Calculate the depreciation expense
for 2012.
Chapter 9-35
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
EquipmentEquipment $510,000$510,000
Plant Assets:Plant Assets:
Accumulated depreciationAccumulated depreciation 350,000350,000
Net book value (NBV)Net book value (NBV) $160,000$160,000
Balance SheetBalance Sheet (Dec. 31, 2011)(Dec. 31, 2011)
After 7 yearsAfter 7 years
Equipment cost $510,000
Salvage value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000
First, establish NBV at date of change in
estimate.
First, establish NBV at date of change in
estimate.
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Chapter 9-36
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Net book value $160,000
Salvage value (new) 5,000
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation $ 19,375
Depreciation Expense calculation
for 2012.
Depreciation Expense calculation
for 2012.
Depreciation expense 19,375
Accumulated depreciation 19,375
Journal entry for 2012 and future years.
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
After 7 yearsAfter 7 years
Chapter 9-37
Ordinary Repairs - expenditures to maintain the
operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Additions and Improvements - costs incurred to
increase the operating efficiency, productive capacity, or
useful life of a plant asset.
Debit - the plant asset affected.
Expenditure During Useful Life
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Chapter 9-38
Chapter 9-39
Permanent decline in the fair value of an asset.
So as not to overstate the asset on the books, the
company writes the asset down to its new fair value
during the year in which the decline in value occurs.
Impairments
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
SO 4 Describe the procedure for revising periodic depreciation.SO 4 Describe the procedure for revising periodic depreciation.
Chapter 9-40
Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).
SO 5 Explain how to account for the disposal of a plant asset.SO 5 Explain how to account for the disposal of a plant asset.
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Illustration 9-16
Plant Asset Disposals
Accounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant AssetsAccounting for Plant Assets
Chapter 9-41
Sale of Plant Assets
Compare the book value of the asset with the proceeds
received from the sale.
If proceeds exceed the book value, a gain on disposal
occurs.
If proceeds are less than the book value, a loss on
disposal occurs.
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
SO 5 Explain how to account for the disposal of a plant asset.SO 5 Explain how to account for the disposal of a plant asset.
Chapter 9-42
Illustration: On July 1, 2012, Wright Company sells office
furniture for $16,000 cash. The office furniture originally cost
$60,000. As of January 1, 2012, it had accumulated
depreciation of $41,000. Depreciation for the first six months of
2012 is $8,000. Prepare the journal entry to record
depreciation expense up to the date of sale.
SO 5 Explain how to account for the disposal of a plant asset.SO 5 Explain how to account for the disposal of a plant asset.
Depreciation expense 8,000
Accumulated depreciation 8,000
July 1
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
Chapter 9-43
Illustration: Wright records the sale as follows.
SO 5 Explain how to account for the disposal of a plant asset.SO 5 Explain how to account for the disposal of a plant asset.
Cash 16,000
Accumulated depreciation 49,000
Illustration 9-17Computation of gain on disposal
Equipment60,000Gain on disposal
5,000
July 1
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
Chapter 9-44 SO 5 Explain how to account for the disposal of a plant asset.SO 5 Explain how to account for the disposal of a plant asset.
Cash 9,000
Accumulated depreciation 49,000
Illustration 9-18Computation of loss on disposal
Equipment60,000Loss on disposal 2,000
July 1
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000.
Chapter 9-45
Retirement of Plant Assets
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
SO 5 Explain how to account for the disposal of a plant asset.SO 5 Explain how to account for the disposal of a plant asset.
No cash is received.
Decrease (debit) Accumulated Depreciation for the
full amount of depreciation taken over the life of the
asset.
Decrease (credit) the asset account for the original
cost of the asset.
Chapter 9-46
Illustration: Assume that Hobart Enterprises retires
its computer printers, which cost $32,000. The accumulated
depreciation on these printers is $32,000. The journal entry to
record this retirement is?
SO 5 Explain how to account for the disposal of a plant asset.SO 5 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 32,000
Printing equipment32,000
Question: What happens if a fully depreciated plant asset is still useful to the company?
Plant Asset DisposalsPlant Asset DisposalsPlant Asset DisposalsPlant Asset Disposals
Chapter 9-47
Illustration 9-19
Analyzing Plant AssetsAnalyzing Plant AssetsAnalyzing Plant AssetsAnalyzing Plant Assets
SO 6 Describe methods for evaluating the use of plant assets.SO 6 Describe methods for evaluating the use of plant assets.
Return on Asset Ratio indicates the amount of net
income generated by each dollar of assets.
Chapter 9-48
Chapter 9-49
Illustration 9-20
Analyzing Plant AssetsAnalyzing Plant AssetsAnalyzing Plant AssetsAnalyzing Plant Assets
SO 6 Describe methods for evaluating the use of plant assets.SO 6 Describe methods for evaluating the use of plant assets.
Asset Turnover Ratio indicates how efficiently a
company uses its assets to generate sales.
Chapter 9-50
Profit Margin Ratio Revisited
Illustration 9-21
Analyzing Plant AssetsAnalyzing Plant AssetsAnalyzing Plant AssetsAnalyzing Plant Assets
SO 6 Describe methods for evaluating the use of plant assets.SO 6 Describe methods for evaluating the use of plant assets.
Tells how effective a company is in turning its sales into income—
that is, how much income each dollar of sales provides.
Illustration 9-22
You can evaluate the return on assets ratio by evaluating
its components.
Chapter 9-51
Intangible assets are rights, privileges, and competitive
advantages that result from ownership of long-lived
assets that do not possess physical substance.
Intangible AssetsIntangible AssetsIntangible AssetsIntangible Assets
Patents
Copyrights
Franchises or licenses
Trademarks
Trade names
Goodwill
Limited life or an indefinite life.
Common types of intangibles:
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Section Two
Chapter 9-52
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Accounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible AssetsAccounting for Intangible Assets
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Chapter 9-53
Patents
Exclusive right to manufacture, sell, or otherwise control
an invention for a period of 20 years from the date of the
grant.
Capitalize costs of purchasing a patent and amortize
over its 20-year life or its useful life, whichever is shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent are
capitalized to Patent account.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Chapter 9-54
Illustration: National Labs purchases a patent at a cost of
$60,000 on June 30. National estimates the useful life of the
patent to be eight years. Prepare the journal entry to record the
amortization for the six-month period ended December 31.
Amortization expense 3,750
Patent 3,750
Cost $60,000Useful life / 8Annual expense $ 7,500
6 months x 6/12Amortization $ 3,750
Dec. 31
SO 7SO 7
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-55
Expenditures that may lead to
patents,
copyrights,
new processes, and
new products.
All R & D costs are expensed
when incurred.
Research and Development Costs
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-56
Copyrights
Give the owner the exclusive right to reproduce and sell
an artistic or published work.
Granted for the life of the creator plus 70 years.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-57
Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
► Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola,
Big Mac, and Jeep.
Legal protection for indefinite number of 20 year
renewal periods.
Capitalize acquisition costs.
No amortization.
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-58
Franchises and Licenses
Contractual arrangement between a franchisor and a
franchisee.
► Toyota, Shell, Subway, and Marriott are franchises.
Franchise (or license) with a limited life should be
amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at
cost and not amortized.
SO 7 Identify the basic issues related to reporting intangible SO 7 Identify the basic issues related to reporting intangible assets.assets.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-59
Goodwill
Includes exceptional management, desirable location, good
customer relations, skilled employees, high-quality products,
etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of ...
purchase price overover the FMV of the identifiable net
assets acquired.
Internally created goodwill should not be capitalized.
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-60
1. The allocation to expense of the cost of an
intangible asset over the asset’s useful life.
2. Rights, privileges, and competitive
advantages that result from the ownership
of long-lived assets that do not possess
physical substance.
3. An exclusive right granted by the federal
government to reproduce and sell an
artistic or published work.
Amortization
Intangible Assets
Copyrights
Illustration: Identify the term most directly associated with each statement.
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-61
Illustration: Identify the term most directly associated with each statement.
4. A right to sell certain products or services
or to use certain trademarks or trade
names within a designated geographic
area.
5. Costs incurred by a company that often
lead to patents or new products. These
costs must be expensed as incurred.
Franchise
Research and
Development Costs
SO 7 Identify the basic issues related to reporting intangible assets.SO 7 Identify the basic issues related to reporting intangible assets.
Types of Intangible AssetsTypes of Intangible AssetsTypes of Intangible AssetsTypes of Intangible Assets
Chapter 9-62
Chapter 9-63
Illustration 9-23
Statement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived Assets
SO 8 Indicate how long-lived assets are reported in the financial statements.SO 8 Indicate how long-lived assets are reported in the financial statements.
Chapter 9-64
Statement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived AssetsStatement Presentation of Long-Lived Assets
A difference between accrual-accounting net income and net cash provided by operating activities is caused by depreciation and amortization expense.
SO 8.SO 8.
Chapter 9-65
Decreasing annual depreciation expense over the
asset’s useful life.
Double declining-balance rate is double the straight-line
rate.
Rate applied to book value.
Declining-Balance
Illustration 9-A1
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-of-balance method and the units-of-activity method.activity method.
appendix 9A Calculation of Depreciation Using Other Methods
Chapter 9-66
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value
Illustration: (Declining-Balance Method)
2012 13,000 40% $ 5,200 $ 5,200 $ 7,800
2013 7,800 40 3,120 8,320 4,680
2014 4,680 40 1,872 10,192 2,808
2015 2,808 40 1,123 11,315 1,685
2016 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation5,200
2012 Journal Entry
Illustration 9-A2
appendix 9A Calculation of Depreciation Using Other Methods
Chapter 9-67
appendix 9A
Declining Current
Beginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2012 13,000$ x 40% = 5,200$ x 9/12 = 3,900$ 3,900$
2013 9,100 x 40% = 3,640 3,640 7,540
2014 5,460 x 40% = 2,184 2,184 9,724
2015 3,276 x 40% = 1,310 1,310 11,034
2016 1,966 x 40% = 786 786 11,821
2017 1,179 x 40% = 472 Plug 179 12,000
12,000$
Journal entry:
2012 Depreciation expense 3,900
Accumultated depreciation 3,900
Partial YearPurchased on
4/1/12
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-of-balance method and the units-of-activity method.activity method.
Illustration: (Declining-Balance Method)
Chapter 9-68
Suited to equipment whose activity can be measured in
units of output, miles driven, or hours in use.
Calculate depreciation cost
per unit.
Expense varies based on
units of activity.
Depreciable cost is cost
less salvage value.
Units-of-Activity
Illustration 9A-3
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-of-balance method and the units-of-activity method.activity method.
appendix 9A Calculation of Depreciation Using Other Methods
Chapter 9-69
Hours Rate per Annual Accum. Book
Year Used x Hour = Expense Deprec. Value
Illustration: (Units-of-Activity Method)
2012 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2013 30,000 0.12 3,600 5,400 7,600
2014 20,000 0.12 2,400 7,800 5,200
2015 25,000 0.12 3,000 10,800 2,200
2016 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2012 Journal Entry
Illustration 9A-4
SO 9 SO 9 Compute periodic depreciation using the Compute periodic depreciation using the declining-declining- balance method and the units-of-balance method and the units-of-activity method.activity method.
appendix 9A Calculation of Depreciation Using Other Methods
Chapter 9-70
Key Points
The definition for plant assets for both IFRS and GAAP is essentially the same.
Both international standards and GAAP follow the cost principle when accounting for property, plant, and equipment at date of acquisition.
Under both IFRS and GAAP, interest costs incurred during construction are capitalized. Recently, IFRS converged to GAAP requirements in this area.
IFRS, like GAAP, capitalizes all direct costs in self-constructed assets such as raw materials and labor. IFRS does not address the capitalization of fixed overhead.
Chapter 9-71
Key Points
IFRS also views depreciation as an allocation of cost over an asset’s useful life. IFRS permits the same depreciation methods (e.g., straight-line, accelerated, and units-of-activity) as GAAP. However, a major difference is that IFRS requires component depreciation. Component depreciation specifies that any significant parts of a depreciable asset that have different estimated useful lives should be separately depreciated. Component depreciation is allowed under GAAP but is seldom used.
IFRS uses the term residual value, rather than salvage value.
Chapter 9-72
Key Points
IFRS allows companies to revalue plant assets to fair value at the reporting date. Companies that choose to use the revaluation framework must follow revaluation procedures. If revaluation is used, it must be applied to all assets in a class of assets. Assets that are experiencing rapid price changes must be revalued on an annual basis, otherwise less frequent revaluation is acceptable.
Under both GAAP and IFRS, changes in the depreciation method used and changes in useful life are handled in current and future periods. Prior periods are not affected. GAAP recently conformed to international standards in the accounting for changes in depreciation methods.
Chapter 9-73
Key Points
The accounting for subsequent expenditures, such as ordinary repairs and additions, are essentially the same under IFRS and GAAP.
The accounting for plant asset disposals is essentially the same under IFRS and GAAP.
Initial costs to acquire natural resources are essentially the same under IFRS and GAAP.
The definition of intangible assets is essentially the same under IFRS and GAAP.
Chapter 9-74
Key Points
Intangibles generally arise when a company buys another company. In this case, specific criteria are needed to separate goodwill from other intangibles. Both GAAP and IFRS follow the same approach to make this separation, that is, companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged. In addition, under both GAAP and IFRS, companies recognize acquired in-process research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can be measured reliably.
Chapter 9-75
Key Points
As in GAAP, under IFRS the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both IFRS and GAAP. Under IFRS, however, costs in the development phase are capitalized as Development Costs once technological feasibility is achieved.
IFRS permits revaluation of intangible assets (except for goodwill). GAAP prohibits revaluation of intangible assets.
Chapter 9-76
Key Points
IFRS requires an impairment test at each reporting date for plant assets and intangibles and records an impairment if the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell or its value-in-use. Value-in-use is the future cash flows to be derived from the particular asset, discounted to present value. Under GAAP, impairment loss is measured as the excess of the carrying amount over the asset’s fair value.
Chapter 9-77
Key Points
IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under GAAP, impairment losses cannot be reversed for assets to be held and used; the impairment loss results in a new cost basis for the asset. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal.
The accounting for exchanges of nonmonetary assets has recently converged between IFRS and GAAP. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. This is the same framework used in IFRS.
Chapter 9-78
Looking into the Future
It is too early to say whether a converged conceptual framework
will recommend fair value measurement (and revaluation
accounting) for plant assets and intangibles. The IASB and FASB
have identified a project that would consider expanded recognition
of internally generated intangible assets. IFRS permits more
recognition of intangibles compared to GAAP. Thus, it will be
challenging to develop converged standards for intangible assets,
given the long-standing prohibition on capitalizing internally
generated intangible assets and research and development costs
in GAAP.
Chapter 9-79
Which of the following statements is correct?
a) Both IFRS and GAAP permit revaluation of property,
plant, and equipment and intangible assets (except for
goodwill).
b) IFRS permits revaluation of property, plant, and
equipment and intangible assets (except for goodwill).
c) Both IFRS and GAAP permit revaluation of property,
plant, and equipment but not intangible assets.
d) GAAP permits revaluation of property, plant, and
equipment but not intangible assets.
Chapter 9-80
Research and development costs are:
a) expensed under GAAP.
b) expensed under IFRS.
c) expensed under both GAAP and IFRS.
d) None of the above.
Chapter 9-81
Under IFRS, value-in-use is defined as:
a) net realizable value.
b) fair value.
c) future cash flows discounted to present value.
d) total future undiscounted cash flows.
Chapter 9-82
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